One of the biggest and transformational fall-outs of the Russia-Ukraine war is the beginning of de-dollarisation, howsoever insignificant it might be projected by analysts. It might not happen sooner but the slide has begun.
Weaponisation of financial instruments with US shutting Russia out of the SWIFT (Society for Worldwide Interbank Financial Telecommunication, 2013) system and freezing its dollar assets in US banks as part of the sweeping sanctions have expedited the process. Most countries are in a fix if they can continue to trust the US led system should they fall or err on the wrong side of the US policy designs. Waking up in time has its own benefits when the world is going through an unpredictable transition and heading more towards instability, bloc politics and implicit confrontation and worse greater resort to unilateralism in international discourse.
It has often been surmised that to maintain the supremacy of the US dollar occasional overt and covert destabilisation projects were undertaken . Gaddafi’s Gold Dinar ambition is said to have become his Waterloo.
US dollar has remained a credible and reserve currency for decades now despite the fact that Nixon detached it from the gold backing since 1974. Moreover, unlike other economies and countries its banking system has been somewhat slow in adapting to new technologies for public use as has been brought out by the Economist ( July 20). It states that ‘although robust it is painfully slow.
American payments are less sophisticated than those in the rest of the rich world and indeed those in much of the poor world too’. Federal reserve has launched Fednow to address these concerns for instant payment system, Apparently 35 banks and 16 payment portal have signed up while many are still not on board. Compare that to India whose digital payment gateways like UPI ( Unified Payments Interface ) have gained traction and currency in India with one of the largest digital transactions.
More than a dozen countries abroad including France and UAE where Indian Prime Minister Narendra Modi recently visited have adopted it for trade and tourism. A more sophisticated form of barter through national currencies is increasingly gaining ground.
Chinese Yuan or Renminbi have taken a focused lead as its trading with partner countries is happening in local currencies including purchase of oil from UAE and Saudi Arabia, which is in fact happening for the first time. Of course, Beijing has also been active in creating alternate financial pillars like the AIIB and BRICS Bank and other developmental financial instruments as it begins to challenge the US economic supremacy.
China's CIPS (Cross Border Interbank Payment system, 2015) clearing and transaction system has begun to be accepted even though it broadly depends and interacts with SWIFT with potential for independent usage as well. As per reports CIPS reported 2.68 million transactions in the first 11 months of 2021, an increase of 58 per cent from a year earlier. The transaction value jumped 83 per cent to 64 trillion yuan (Shanghai Securities News ). At this stage Chinese CIPS and Yuan are still in a collaborative mode with inherent objective of competing with Dollar space since Swift set up a wholly-owned subsidiary in Beijing in 2019, while it also formed a joint venture with several affiliates of the Chinese central bank in early 2021, including CIPS.
Rupee-Ruble trade
Another pole in this domain is the most sanctioned country Russia, which has enough gold reserves to sustain its Ruble and is working closely with its major partners China, India and UAE to deal in respective national currencies. India and Russia have experience in Rupee -Ruble trade since Soviet times and the mechanisms have been smoothened even though given a sudden surge in trade due to high oil imports some reservations were reported. Due to excessive surplus of Rupees, Moscow was looking to get payments in another tradeable currency either Euro Dollar or Dirham to pay off its other liabilities or to beef up hard currency reserves.
Of course, intermediary banks in the UAE and elsewhere have come under closer scrutiny as they are still under the western eco system. In any case we witnessed that in the wake of US and western sanctions and withdrawal of Visa, Masters and other credit cards from Russian financial space an immediate shift to Chinese currency backed cards was resorted to.
However, it has been increasingly introducing and using its Ruble-based payment system called the System for Transfer of Financial Messages (SPFS) which was set up in 2014. Moscow and Beijing are working to align the SPFS with CIPS even as the challenge is stupendous since most of the global trading currency of over 80% is still couched in the green backs.
In the wake of former US President Trump walking out of the P5+1 nuclear deal (JCPOA) with Iran, Tehran was banking on the Europeans to develop an alternative system to avoid and circumvent the penalties from US sanctions and SWIFT. But even as European Union devised its SEPA ( Society for Worldwide Interbank Financial Telecommunication) system network with 46 countries their political commitment to work with Iran at the expense of US displeasure fell far short shoving a disenchanted Tehran back into the Chinese fold even more.
Swift with nearly $5 trillion worth of transactions daily with a network 11000 banks and financial institutions overly dominates the international financial landscape even as some chinks in the armour are quite visible . Of course there are some existing mechanisms like WISE and Cyprus based Profee also in the game. Even though efficient they have inherent limitations of economic space and broader acceptability.
Expanding threat of cryptocurrency
Another threat is of course in the form of expanding footprint of the cryptocurrency whose regulations remain a major preoccupation under India’s G20 presidency.
The other exciting prospect that is being talked about is the BRICS currency which as per the Russians is going to be gold backed. Some indications may emerge at the next summit in South Africa in August even as India a prominent and central part of BRICS did not seem very sanguine at this stage.
However, given the ongoing global turmoil the disruption is the common denominator. Over two dozen countries from Africa to Asia to Latin America to the rich Arab and GCC majors are keen to join the BRICS which they perceive as capable of evolving into a credible financial alternative since their cumulative economic heft might surpass those of the G7 in near term.
As per government estimates ,digital transactions have seen an unprecedented growth in India, with 40 percent of all transactions, worth $3 trillion being digital in 2021. In 2022, India led the world in real-time payments, accounting for an impressive 46 percent global share, with 89.5 million digital transactions. Projections also indicate that India's digital payment market is set to triple to $10 trillion by 2026. India also became one of the first country to launch its digital rupee. Therefore, the UPI and Rupay cards have achieved greater relevance and are gaining traction.
While New Delhi does not seem to be looking to replace any currency it surely is positioning UPI and Rupee as an internationally acceptable alternate transactional medium with reduced transaction costs and much less uncertainty. It is not coincidental that India is the biggest importer, consumer and holder of household gold accounting for 11 percent of the world total.
Interestingly, several temples have been found to be in possession of huge quantities of gold and jewellery which ought to provide the backup strength and resilience to the currency howsoever, idyllic it may sound. Moreover, India is also providing billions of dollars in lines of credit and capacity building assistance across continents to over 160 countries and designating and routing these through UPI and Rupee denominations might be a game changer both for India and the recipient countries.
Most recent adherent to Indian UPI and Rupee is Sri Lanka whose President Ranil Wickremesinghe, during his visit to India ( July 21-22) agreed to let Indian travellers and trade settlements to use Rupee like Dollar, Yen or Euro .Allowing its direct use would prevent the need for multiple currency conversions for Indian tourists and businessmen said his Foreign Minister.
It is logical that India, currently 5th largest economy and soon to be the 3rd, provides a stable financial fulcrum by itself and also through its G20 Presidency outcome. However going forward the global challenge will be the relationship among various evolving and existing financial mechanisms. Whether de-dollarisation will pace up or not financial de-hyphenation is here to stay.
—The author, Amb. Anil Trigunayat, is a former Indian Ambassador to Jordan, Libya and Malta, and currently heads the West Asia Experts Group at Vivekananda International Foundation. Views expressed are personal.
Read his previous articles here (Edited by : C H Unnikrishnan)
First Published: Jul 24, 2023 9:23 AM IST
